The Business Case for Productization
Would you rather fight fires forever or build a fire-proof house?
I recently asked a client, “Why do you want to productize?”
He told me their business model of offering bespoke services has them in a perpetual state of reactivity, which wasn’t going to accelerate their growth. He didn’t want to fight fires, he wanted to be more proactive. He said, “I want to build a fire-proof house.”
The vision of “building a fire-proof house” is why he decided to make productization a key element in his long-term strategy: They will win by standardizing and tech-enabling the delivery of their services to scale the business, create new revenue streams, and hopefully escape the fire-fighting, feast and famine, hard to forecast model of custom services.
While Productization can increase the predictability and efficiency of service delivery and even open up new market opportunities, there are myriad other benefits as well. And if you’re a B2B services organization, there is a strong case for why Productization should be a top strategic initiative for your company in 2024.
#1. Companies that have productized are more profitable, grow faster, and achieve higher valuations compared to their peers.
- Without products, a firm’s revenue growth will be limited by the speed at which you can add and train staff. Well-designed and well-delivered products can help grow revenue at 2x - 3x the current rate because of the effort associated with hiring, training, and ensuring quality across more people.
- A “product” company typically has a gross profit margin ranging from 60-90% vs. industry standard of approximately 40% for customized professional services. Although there are higher upfront costs with product development, the introduction of marketable products can increase revenue with less investment over time.
- Product and “as a service” companies have much higher valuations (e.g., 8x revenue) than traditional professional services firms (e.g., 1x revenue) because they have better profit margins, greater opportunity for revenue growth, and improved revenue visibility. Without distinct products, business service firm valuations are developed using highly subjective variables, such as the defensibility of IP, the strength of client relationships, and the knowledge/skills of their team.
These types of business benefits don’t happen overnight - getting started sooner rather than later will help you realize these monetary benefits more quickly.
#2. The market is changing.
- All companies are quickly becoming digital businesses. According to recent McKinsey research, 9 out of 10 companies, across all industries including B2B services, are creating digital businesses to stay economically viable. In a post-pandemic world, the pace of business has accelerated and the use of technology is the way that successful organizations are keeping up with this pace. This is already underway in all industries and B2B services organizations risk falling behind the competition if they don’t act soon to digitize and scale.
- Generative AI is both a threat and an incredible opportunity for services businesses. While it’s still relatively new, we are already seeing significant disruption in areas such as content generation, design, advertising, legal, accounting, and market research. Every service sector is potentially vulnerable to disruption by generative AI. For example, Goldman Sachs estimates that AI will automate 44% of legal work, 37% of architecture and engineering tasks, 35% of financial operations, and 26% of design work. However, every service sector also stands to gain from a deep exploration of how to use generative AI to scale existing services.
A non-decision or inaction is, in fact, a decision to not keep up with rapid market change. Now is the time to explore, experiment, and lay the groundwork for productization or risk falling behind. Keep in mind that it’s better to disrupt ourselves than to be disrupted by a competitor.
The image below highlights Productization in full force: B2B professional services firms in a diverse array of industries such as legal services, accounting and financial services, management consulting, HR services, engineering and construction services, and IT services are launching tech-enabled services and products such as software and data, often powered by AI.
#3. B2B buyer behavior has evolved.
- B2B buyers now prefer subscription-based products since they are easier to budget for and grow in value. By 2024, B2B subscription services are expected to reach an astounding $344.3 billion, with a 24% compound annual growth rate (CAGR). And that is actually good news because subscription businesses are growing revenues 5x faster than their S&P 500 counterparts (18.2% vs. 3.6%) as measured over the last 8 years.
- Buyers prefer on-demand purchasing and want alternative options for faster, lower-touch ways to engage with sellers. 2 out of 3 B2B buyers opt for remote human interactions or digital self-service, and 72% of buyers prefer a sales rep-free experience according to Gartner research. Because of these preference changes, buyers are willing to consider ‘digital-first’ product companies that are expanding into services. Again, those that don’t act soon risk being overtaken by fast-moving competitors.
- B2B customer loyalty is declining, according to research from DCM Insights. Within the next 5 years, repeat buyers of traditional professional services are expected to decline to just over 30%. This trend is existential for B2B services companies that have long relied on customer loyalty to bolster revenue and continue operations.
Just as we need to listen to our customers when creating new offerings, we need to listen to them when taking those offerings to market. It’s a losing game to keep selling services the way you always have. What has gotten your organization to where you are today will not get you where you want to be in the future.
#4. The customized services model strains and stresses your talent.
- Let’s be honest – having to deliver a bespoke engagement for every client is excruciating. According to the U.S. Bureau of Labor Statistics, professional service firms have the fifth-worst industry retention rate at 63.5%. Burnout and a tight labor market make it challenging to find and retain top talent needed for custom consulting work. While digital products do require upfront investments, gross margins are higher in the long term and your firm becomes less key-person dependent. Even if you decide to create pre-packaged service bundles instead of full-fledged products, you can increase productivity and train lower-cost talent on how to deliver these service bundles.
- Not only are custom services projects more difficult on delivery teams, but they are much harder on sales teams and require more specialized talent. Bespoke services revenue is often not delivered in long-term contracts and, thus the revenue is harder to predict. Digital subscriptions provide long-term relationships with customers with less pressure on sales to consistently bring in new clients while delivering a predictable, recurring revenue stream.
Productization can help reduce burnout while allowing creativity to blossom. It’s always the right time to make your organization a better place to work.
So how do you get started?
- Think about the type of business you want to be, why you want to look like this, what success looks like for your organization, and what you want to be known for by your customers and investors. Starting with your Productization archetype (see below) helps you to craft a clear, compelling vision that will accelerate internal alignment, bring down anxiety about change, and shape investment decisions.
Vecteris is purpose-built to help you successfully productize your offerings – reach out today to learn how we can help.